Legg Mason’s Bill Miller still bullish

Despite his poor performance in recent years, Legg Mason (LM) portfolio manager Bill Miller remains bullish on stocks. He writes in a letter to Legg Mason Value Trust shareholders Wednesday that “with most investors being fearful, I think it makes sense to allocate some capital to the greedy side of that pendulum, and that means putting cash to work in equities.”

Miller’s comments come after the Value Trust posted a 20% decline in the first quarter, weighed down by big bets on Bear Stearns (BSC), Countrywide (CFC) and Washington Mutual (WM), among others. But Miller says the fund has been doing better in April’s healthier market. And he notes that despite the criticism of his money-losing Bear Stearns investment, Legg Mason actually has had a much bigger position in JPMorgan Chase (JPM) - whose shares have risen since the big bank agreed to buy Bear in a Fed-induced rescue.

Miller’s 15-year-long streak of outperforming the S&P 500 is history now, in the wake of poor performances in 2006 and 2007. But that doesn’t mean Miller is ready to let go. “My friend Jeremy Hosking, who has delivered around 400 basis points per year of excess return over two decades at Marathon (in London), corrected me recently when I spoke about our underperformance,” Miller writes. “‘You mean, your deferred outperformance,’ he said. I thought it a clever line, but it contains an important point.”

You might assume the point is that no one should ever bring up Miller’s recent negative returns, but that’s not quite it. “For value investors, price is one thing, and value is another,” Miller explains. “When prices move against us, it usually means that the gap between price and value is growing, and our future expected rates of return are higher.”

While that sounds nice, the recent action in some big Miller holdings - his top 10 positions at March 31 included UnitedHealth (UNH) and General Electric (GE), both of which recently saw big stock price drops after poor earnings performances - offers a reminder that high expectations can be tough to live up to.